Interested in receiving the latest title insurance, real estate and legal industry news? Click here to sign up for our free Newsletter.
Real Property Law section 339-z, protects the enforceability of the condominium common charge lien from all liens except the lien of a first mortgage. The statute states that, “The board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all liens except only…(ii) all sums unpaid on a first mortgage of record….”
What types of mortgages are given priority over subsequently filed common charge liens has been determined by case law. In Dime Savings Bank of New York v. Levy, the first mortgage was adjudicated to include not only purchase money mortgages but also a subsequent gap mortgage that was consolidated with the purchase money mortgage prior to the filing of a common charge lien. Greenpoint Bank v. El-Basary, included within the meaning of first mortgages, a non-purchase money mortgage that is recorded ahead of common charge liens.
A recently decided Supreme Court case further clarifies the priorities between a common charge lien and a first mortgage. In AMT CADC Venture, LLC v. 455 CPW, L.L.C., a condominium sponsor gave a gap mortgage which it consolidated with previously existing mortgages to secure a loan on several unsold residential condo units and a commercial parking space. After the recording of the consolidation and the gap mortgage, the mortgaged units were encumbered by a recorded common charge lien. An action to foreclose the mortgages was brought, and the condominium’s board of managers counterclaimed by attempting to foreclose its own common charge lien, which it argued had priority over the mortgage lender’s blanket mortgage. The condominium board’s chief argument was that the statutory priority afforded under section 339-z to first mortgages only extended to purchase money mortgages, and not to blanket mortgages made by the condominium sponsors.
In reaching its finding, the court first examined the condominium statute and found no definition of the term “first mortgage.” It then stated that absent a statutory definition, it would rely on the plain meaning of the term. The court found that the term “first mortgage” means the “earliest recorded mortgage.” It also found that the statute’s failure to explicitly exclude blanket mortgages from the term first mortgage was direct evidence that the legislature did not intend to exclude such mortgages. The condo board argued that the legislative intent behind the statute supported a finding that the statute should be limited to purchase money mortgages. Specifically, the board argued that the statute was designed to “support apartment ownership by giving priority to banks' mortgages as an incentive for banks to extend mortgages to prospective condominium unit purchasers, see Dime Sav. Bank of N.Y. v. Pesce, 93 N.Y.2d 939, 941 (1999), and to discourage condominium sponsors from stockpiling units instead of selling them.” In response, the court indicated that examining the legislative intent behind the statute under these circumstances was unwarranted. Notwithstanding, the court found no relationship between this statutory purpose and excluding blanket mortgages from the term “first mortgage.” The court similarly rejected the board’s arguments that National Housing Act were dispositive, since the federal statute did not address the same subjects addressed by New York’s condominium statute.
Finally, the board argued that if a blanket mortgage was included under the rubric of a first mortgage, the priority would extend only to the original blanket mortgage and not to a subsequently consolidated mortgage. The court rejected this argument stating that the recording of the consolidation of the gap mortgage had preceded the recording of the condominium board’s common charge lien and therefore was entitled to priority along with the original blanket mortgage.
The real estate downturn of 2008 created a glut of purchasers with buyer’s remorse, looking to rescind their contracts of sale. Some prospective purchasers of condominium units looked to the Interstate Land Sales Full Disclosure Act (“ILSA”), 15 U.S.C. 1701 et seq., to provide them with an out that would allow them to walk away with their down payments intact. ILSA was enacted by the federal government in 1968 to protect purchasers from fraudulent interstate sales of undeveloped land. Unscrupulous developers were able to dupe unsuspecting investors into purchasing out-of-state land that was unsuitable for development by making deceptive representations regarding the condition of the land. ILSA countered this problem by requiring sellers of undeveloped land to submit a property disclosures to HUD, known as a “statement of record,” and to the prospective purchaser, known as a “property report.” A failure to adhere to the technical reporting requirements under ILSA would give a prospective buyer a right of rescission running two years from the date of the signing of the contract of sale. Although ILSA does not specifically state that it applies to purchases of condominium units within yet to be built condominiums, some buyer’s attorneys were able to make the case that ILSA applied to undeveloped land and undeveloped condominiums alike.
Although the days of buyer’s remorse are behind us, some actions like Aviral Rai and Sangeeta Rai v. WB Imico Lexington Fee, LLC, 09 Civ. 9586 are only recently decided. In this case, the plaintiff Rai, sought a rescission of their contract to purchase a condominium unit in Manhattan, and a return of their down payment. The plaintiffs argued that the sponsor failed to comply with ILSA because (1) the contract of sale did not adequately describe the condominium unit to be purchased; and (2) because they were not provided with a property report, as mandated under ILSA. As to the first point, Rai argued that the contract’s failure to recite the tax lot number of the unit did not comply with Section 1703 (d)(1) which requires any contract for the sale of a lot to provide “a description of the lot which make such lot clearly identifiable and which is in a form acceptable for recording.” The court rejected this argument, stating that the contract otherwise sufficiently described the units including (a) the metes and bounds description of the land on which the condominium was located; (b) a description of the building; (c) a unit designation of each condominium unit; and (d) a description of each unit’s percentage of common elements. The court’s refusal to require a tax lot unit was significant because tax lot units for yet to be built condominium buildings, more often than not, will not have valid tax lot unit numbers until the declaration of condominium is recorded.
The condominium sponsor was unable to overcome the second point however. Section 1703(a)(1)(B) requires that the seller to provide the purchaser with a property report prior to the signing of a contract of sale. Here, although the sponsor had not sent the property report to the purchaser, it was still in compliance with ILSA because it had sent the property report to the buyer’s attorney. The court found no statutory basis supporting the sponsor’s argument and found the failure to provide the buyer with property report prior the signing of the contract to be a violation of the ILSA disclosure requirement and declared the contract revoked, entitling the purchaser to a return of their deposit, certain damages, attorney’s fees and costs.
Congress has not been unaware of the courts support of ILSA as a consumer protection measure for condominium unit purchasers. On September 26, 2013, the U.S. House of Representatives, approved H.R. 2600, by a vote of 410-0, a bill introduced by Carolyn Maloney of New York, to exempt condominium developments from the reach of ILSA. Once approved by the Senate and signed into law, new condominium projects started after the enactment of the law would be free of ILSA’s requirements. Until then, parties to condominium purchases are advised to pay close attention to ILSA and its technical requirements.
A tax of $2 per $500 of consideration is imposed under Section 1402 of the Tax Law on conveyances of real property. Section 1401(e) of the Tax Law includes within the definition of conveyance, “the transfer or transfer of any interest in real property by any method.”
This Section states that a “transfer of an interest in real property shall include the creation of a leasehold or sublease only where
1. the sum of the term of the lease or sublease and any options for renewal exceeds forty-nine years,
2. substantial capital improvements are or may be made by or for the benefit of the lessee or sublessee, and
3. the lease or sublease is for substantially all of the premises constituting the real property.
Since 1401(e) makes clear that a taxable conveyance includes not only the creation of a lease, but a subsequent assignment of lease. A lease containing an option to purchase will be taxable regardless of its lease term.
If all three conditions are met, the transfer tax will be calculated on the present value of the net rental payments for the term of the lease. If any one component is not satisfied, then no transfer tax is due.
If the lease term is 49 years or less, generally speaking, no transfer tax will be due. A lease with a lease term less than 49 years may still be subject to transfer tax if it contains a renewal term which when added to the original lease term exceeds 49 years. A subsequent modification of the lease term that extends the original lease term beyond the 49 year period may similarly cause the lease to be subject to transfer tax. Not all periods of physical access to demised premises may be counted towards the 49-year period. A 1999 NYS Dept. of Taxation and Finance advisory opinion (TSB-A-99(1)R) has indicated that the period of time that the lessee was given to obtain permits and approvals needed to construct improvements on the demised premises, did not constitute “use or occupancy” of the premises by the lessee, and therefore did not count toward a determination of whether the lease period exceeded the 49 year period.
To determine what constitutes substantially all of the premises, the state will consider the Real Estate Transfer Tax Regulations contained in Title 20 of the NYCRR Part 575.7(a)(3) , which defines the lease premises to include, but is not limited to
The Regulations state that “substantially all” means 90 percent or more of the total rentable space of the premises, exclusive of common areas. The State has stated that it will consider each lease on a case by case basis to determine what is considered total rentable space. In TSB-A-07(2)R, the Department of Taxation and Finance issued an advisory opinion in which it found that no transfer tax was due on a leased parcel within a shopping center because the total rentable space was defined as the entire shopping center, as opposed to the leased parcel only.
A real property transfer tax of is imposed under Title 11 of the NYC Administrative Code Section 11-2102. Concerning leaseholds, it states as follows:
“With respect to a grant, assignment or surrender of a leasehold interest in real property made on or after August first, nineteen hundred eighty-nine …. the amount subject to tax in the case of a grant of a leasehold interest shall be only such amount as is not considered rent for purposes of the tax imposed by chapter seven of this title.”
In other words, a leasehold interest is not subject to NYC real property transfer tax if the amount paid under the lease is rent for the use and occupancy of the leased premises, which is subject to the City Commercial Rent or Occupancy Tax (“CRT”). If the payment to be made by the tenant is consideration for the use and occupancy of the leased premises it is rent under the CRT and no NYC real property transfer tax is due on that payment.
NYC Administrative Code Section 11-701.6 describes consideration for use and occupancy as -
“The consideration paid or required to be paid by a tenant for the use or occupancy of premises, valued in money, whether received in money or otherwise, including all credits and property or services of any kind and including any payment required to be made by a tenant on behalf of his or her landlord for real estate taxes, water rents or charges, sewer rents or any other expenses (including insurance) normally payable by a landlord who owns the realty other than expenses for the improvement, repair or maintenance of the tenant's premises.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. at (212) 651-1200 or keng@prestitle.com.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
Click Here to See Our Previous News Letters